Working Paper: NBER ID: w27355
Authors: Mahyar Kargar; Benjamin Lester; David Lindsay; Shuo Liu; Pierre-Olivier Weill; Diego Ziga
Abstract: We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades increased dramatically at the height of the sell-off, forcing customers to shift towards slower, agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially, but did not fully subside.
Keywords: Corporate Bonds; Liquidity; COVID-19; Federal Reserve; Market Interventions
JEL Codes: E5; E58; G0; G01; G12; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's interventions (E52) | market liquidity (G10) |
| cost of trading risky-principal trades increased significantly (G19) | customers substituted agency trades for risky-principal trades (G18) |
| Federal Reserve's interventions (E52) | cost of risky-principal trades decreased significantly (G19) |
| SMCCF (Y90) | trading costs for eligible bonds (G12) |
| announcement of SMCCF (E60) | cost of agency trades for eligible bonds (G24) |
| Federal Reserve's interventions (E52) | recovery in dealer supply (L81) |
| loss in consumer surplus from immediacy (D11) | relative price premium for immediacy (D49) |